With decades upon decades of data to sift through, many stock market pundits will have you believe that markets can be bought and sold according to seasonal effects. Of course, as dividend growth investors we are more concerned with investing in the market at all times rather than trying to time the market. With the magic of compounding the saying, “time in the market is better than timing the market,” certainly holds true. But still, there are many out there who believe in stock market seasonality to guide their investment decisions. Let’s examine some of the more common stock market seasonal themes that numerous talking heads and media experts like to tout.
This is a term that is often discussed every calendar new year. The “January effect” actually has come to define two distinct investment phenomena. The first definition of the January effect suggests that the rest of the calendar year will perform as January does. The thinking behind this definition states that, “As goes January, so goes the year.” Of course, this type of observation may be a little too simplistic for many investors to digest as one month of stock market gains or losses cannot truly define an entire year. The second definition of the January effect has its roots with investors seeking to capitalize on stock losses for the current year. The thinking behind this phenomena suggests that investors sell their stocks at year end to harvest losses in order to minimize their current year tax burden. As a result of all the stock selling towards the year end prices depreciate only to recover when the buying back begins at the start of the new year raising prices.
Sell In May And Go Away
Another famous term that always flowers around spring time is the famous, “Sell in may and go away.” The exact cause for this stock market pattern is still largely in question but many of the market pundits will have you believe that the strongest period of any stock market calendar year rests between the months of November to April therefore at the start of May it would be wise to sell your stocks and hold cash till the traditionally stronger autumn season. Of course, as dividend growth investors the very idea of holding cash instead of dividend paying stocks for about six months is sacrilegious. Think of all the lost compounding time for your dividends to achieve.
Related to the “Sell in May and go away,” investment meme is the “Halloween indicator.” If it is wise to sell in May during the theoretically weaker calendar months of spring and summer then the best times to deploy your cash is during the stronger months of November to April. The Halloween indicator then suggests that it is best to begin purchasing stocks around the end of October as stock prices begin to rise into the holiday shopping season.
Santa Clause Rally
Next, we have the “Santa Claus Rally,” mantra. This stock market occurrence typically happens in late December when most bonuses are paid to employees and many mutual fund managers “Window dress” (see below) their portfolios. As a result, a large injection of fresh capital is infused into the market enabling higher prices towards the end of the month. Of course, the Santa Claus rally is somewhat counterintuitive to the January effect whereby investors increase the selling of their losing stocks in order to harvest tax losses for the current year thereby depressing prices. I think you can see how “effective” a lot of these seasonal investment themes really are.
Finally, we have the “Window dressing” effect which suggests that mutual and portfolio fund managers seek to improve the appearance of their portfolio holdings toward the end of a quarter or calendar year by selling stocks that are under-performing while purchasing high flying names to replace those that are sold. By dumping poor performing stocks and acquiring stocks that are on an upswing an investor might experience even greater price appreciation for these high flying names. By having fund managers “window dress,” they can then report better performing stocks as part of their holdings.
While there are dozens of studies and statistics that support these investment themes it isn’t suggested that one follows them blindly. Does stock market seasonality play any part in your investment decisions? Please let me know below.